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Playing The Range

02 February 2017 by lberuti

It looks as if all the players in the credit market have the same points at the moment. On iTraxx Main (ITXEB) for instance, they buy protection at 68bps and they sell at 73bps where RSI – a technical indicator which estimates whether a security is overbought or oversold – become a bit stretched given the price action of the last few weeks. Today confirmed it and 73.5bps proved too high a hurdle to clear for ITXEB, making the session one to forget for the bears. ITXEB closed 1.75bps tighter at 71.75bps, but it has to be said that its fair value was unchanged on the day. The same was true for iTraxx Crossover (ITXEX), which was unable to clear the 300bps level decisively and closed 6.5bps tighter at 295.5bps while its fair value was 0.4bps wider. Playing the range is possible with credit indices which are the most liquid instruments and allow people to cut or even invert their exposures very easily. Doing the same with single reference CDS is much trickier because of more punitive bid/offer spreads. Inverting the recent trend wider on single names will require some confirmation. They took stock and stopped widening, but today’s moves of ITXEB and ITXEX can be entirely pinned down to change in bases.